Innovation

R&D Ensures 'Prosperity of the Fittest'

December 23, 2009

By Will Daley

(Bloomberg) — 3M Co. will increase spending on research, product lines and acquisitions next year in an effort to emerge from the recession farther ahead of weaker competitors, Chief Executive Officer George Buckley said.

3M maintained this year's research and development funding at about $1.2 billion in the economic slump and will spend as much as $100 million in 2010 to advance product lines and research, partly to hire 60 to 80 employees with doctorates, Buckley said in an interview. Capital expenditures will rise as much as 15 percent to about $1.05 billion.

"I knew that if we kept on investing in R&D, and we kept it pretty much flat, that increasingly as other weaker companies couldn't maybe spend so much in R&D that there would be a separation," Buckley said at 3M's St. Paul, Minnesota, headquarters. It's "prosperity of the fittest."

Buckley, 62, says he's entering his fifth year as CEO working to reignite creativity at the inventor of consumer staples such as Scotch transparent tape. The pipeline includes a coating that may keep cars and solar cells clean without washing and a new ceramic abrasive, Cubitron II, whose grain self- sharpens during use to extend the life of the material.

"We invented the Holy Grail of abrasives," Buckley said in the Dec. 18 interview. "These things change the basis of competition."

3M shares have almost doubled since closing at $41.83 on March 6 and have risen about 5.5 percent since Buckley, a native of Sheffield, England, who holds a doctorate in engineering, arrived in December 2005 from Brunswick Corp. 3M rose 53 cents to $81.96 at 4:15 p.m. in New York Stock Exchange trading.

'R&D Roots'"He is pulling, pushing and driving 3M back to its R&D roots," said Deane Dray, an analyst at FBR Capital Markets in New York. "This is a company that prides itself on developing the most iconic products. That all came out of internal innovation, and he wants to make sure that that's not lost."

Buckley said he's having less luck ridding 3M of what he calls "zombie" products that have outlived their need. While 3M officials talk about running 55,000 product lines, Buckley says there are likely more than a million individual items.

Two years ago 3M started trying to reduce its number of SKUs, or stock-keeping units, by about half. About 95 percent of sales are in the top 50 percent of SKUs, he said.

"Things die very badly here," Buckley said. "We have lots of zombies in this company. What they produce is disorder."

3M has knocked out tens of thousands of such products in the past year and it will be "another couple of years" before the job is completed, he said.

Acquisitions Resume3M will resume a regimen of about 15 to 20 acquisitions a year for a total of about $1 billion in 2010, Buckley said. Two were completed so far this year, Bloomberg data show. Areas of focus have been in dental products, helping health care become the second-largest division with about 18 percent of sales in 2009's first nine months, water treatment, and acquisitions overseas.

"We are using these kind of acquisitions to show the art of the possible when it can be done fast," Buckley said. As for larger targets, 3M may consider one or two acquisitions in the next four years for less than $4 billion each. "We won't be going out and acquiring anything at $15 billion—it's just not going to happen," he said.

In addition, 3M has set aside about $20 million for a venture fund to invest in development-cycle companies such as Artificial Life Inc., a maker of applications for iPods in Santa Monica, California. 3M has also taken a stake in a German display technology company.

Balance SheetWith about $4 billion cash on the balance sheet and some $5 billion expected from operations in 2010, "we have plenty of powder to fund these just from cash," Buckley said of his acquisition plans. "We won't need to raise any debt."

3M may retire about $400 million in debt coming due in 2010, he said, adding that no decision has been made. The two largest ratings services this year lowered 3M by one level, to AA- at Standard & Poor's and Aa2 at Moody's Investors Service.

The company has trimmed about 6,400 jobs worldwide since last year, to about 75,000, and Buckley said he expects no large reductions in 2010 unless conditions change.

3M forecasts 2010 sales of as much as $25.5 billion, up about 12 percent from the $22.7 billion average analyst estimate in a Bloomberg survey for 2009 and more than the $25.3 billion of 2008. Earnings may rise to $4.97 a share in 2010 from about $4.54 this year, the average estimates show.

The recession that started in 2007 and the global credit crisis that took hold in late 2008 proved the "resiliency of the economic model" and leadership team at 3M, Buckley said.